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Tuesday 29 April 2014

Diamonds v/s Stock Markets

Diamonds have always drawn our eyes to them as symbols of eternal love and fealty. The reality of the world economy now though is that with market fluctuations ruling the roost and many countries still struggling with the impact of the worldwide recession, people’s faith in the stock market is seen to be failing. People around the world are looking at newer avenues for investment and without a doubt, traditional safe havens like gold, property and other tangible assets are prized more than stocks these days.

According to a paper by economists Scott and Yelowitz, diamonds are appreciated not only because of the (conspicuous) consumption utility they provide, but also because they are a store of value. After the recent auction sale of a pink diamond for the record price of 45.75 million USD, a jewelry expert commented that, ‘‘nobody knows what they are buying with stocks, but here they are buying something solid and tangible.’’

Recent surveys by Capgemini (2010)and Barclays (2012)confirm that, in times of
crisis, high-net-worth individuals are drawn to real assets that are perceived to have high intrinsic value. Nearly one third of the owners of precious jewelry interviewed by Barclays indicated to own the asset to provide security should other investments fail.

The above examples are unanimous on one simple fact: People have lost their faith in the stock markets post the global economic meltdown. In this sort of an environment, many investors are looking back to more traditional kinds of investments, that in their eyes for whatever reasons will not fail.

Let’s take an analytical look at the major difference between diamonds and stocks as investments:

Are perceived as storehouses of value.
Have an inherent value which can fluctuate given market conditions
Are rare and therefore are more expensive to purchase
Are a lot more affordable, can be bought by anyone
Their rarity ensures that people who invest in them recover their investment and make a clean, tidy profit on their sale as well
Stocks make a sound investment if the market conditions are favourable, people can make a good profit off them, but again any slight change in market fortunes could derail one’s investment
Are tangible, and can be worn and therefore are an endowment that can be transferred in the form of gifts and heirlooms
Are intangible and in some cases non-transferable, do not make gifts and in the current economic condition are not safe bets
Along with gold and property, diamonds are looked at as stable investments which could easily be vaulted and banked on for a rainy
Were looked at as a way to make a decent amount of money before cashing in. These days though, they aren’t considered all that lucrative. Could be a passing phase though
Are always contemporary or relevant, whatever the prevalent ‘economic’ environment
In the current economic scene are looked at with cynicism and great caution by people in the know about investments

The current trend of investing in safe havens can be traced back to the early to mid seventies as is seen in the following excerpt from Renneboog and Spaenjaers, Financial Letters (2012):

“The uncertain economic climate of the late 1970s and the early 1980s, there was increased
demand from investors for tangible but easily storable assets, such as gold (Ibbotson and Brinson,1993), stamps (Dimson and Spaenjers, 2011), and gemstones. Diamond investor manuals (Sutton,1979; Dohrmann, 1981) elaborated extensively on the advantages of investing in diamonds, claiming that diamonds have a track record of centuries of steady price appreciation.”

This quote makes it apparent that the mistrust of the stock market may not be just a passing phase but to many investors has been around for quite a while. 


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